Does Shandong Weigao Group Medical Polymer (HKG:1066) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Shandong Weigao Group Medical Polymer Company Limited (HKG:1066) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Shandong Weigao Group Medical Polymer

How Much Debt Does Shandong Weigao Group Medical Polymer Carry?

The chart below, which you can click on for greater detail, shows that Shandong Weigao Group Medical Polymer had CN¥4.20b in debt in June 2023; about the same as the year before. But it also has CN¥7.06b in cash to offset that, meaning it has CN¥2.85b net cash.

How Healthy Is Shandong Weigao Group Medical Polymer's Balance Sheet?

We can see from the most recent balance sheet that Shandong Weigao Group Medical Polymer had liabilities of CN¥6.60b falling due within a year, and liabilities of CN¥3.75b due beyond that. Offsetting this, it had CN¥7.06b in cash and CN¥7.99b in receivables that were due within 12 months. So it can boast CN¥4.69b more liquid assets than total liabilities.

This surplus suggests that Shandong Weigao Group Medical Polymer is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Shandong Weigao Group Medical Polymer boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Shandong Weigao Group Medical Polymer's EBIT dived 14%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Shandong Weigao Group Medical Polymer can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Shandong Weigao Group Medical Polymer has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Shandong Weigao Group Medical Polymer recorded free cash flow worth 57% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shandong Weigao Group Medical Polymer has CN¥2.85b in net cash and a decent-looking balance sheet. So we don't have any problem with Shandong Weigao Group Medical Polymer's use of debt. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Shandong Weigao Group Medical Polymer insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.